DBRS Confirms Texas Eastern Transmission, LP at BBB (high), Stable Trend

DBRS has today confirmed the long-term debt rating of Texas Eastern Transmission, LP (TETLP or the Company) at BBB (high) with a Stable trend. The confirmation reflects TETLP’s strong operational and financial metrics, which are expected to remain stable over the medium term. TETLP is an integral part of Spectra Energy Capital, LLC’s (Spectra Capital) natural gas pipeline network, supported by production in the Gulf Coast region and strong demand in the U.S. Northeast. The rating also reflects the following factors:

(1) TETLP’s rating is limited by the BBB (high) rating of Spectra Capital due to the integration of operations and cash management functions at the parent company. In addition, TETLP advances all excess cash flow to Spectra Capital after meeting its own capital expenditure, debt repayment and operating needs. This policy is expected to continue given the significant capex program outlined by Spectra Capital, which plans to invest about $2.9 billion during 2008 to 2010 (almost 75% of its $4.0 billion growth capex for that time frame) to expand its U.S. Transmission segment, which is focused on the Northeast natural gas market. As a result, it is expected that Spectra Capital will generate negative free cash flows on a consolidated basis. While recognizing that TETLP’s credit profile is closely linked to Spectra Capital, DBRS expects the Company’s credit measures to remain strong. The improvement in Spectra Capital’s credit profile in recent years has reduced the risk that it would enhance its own resources at TETLP’s expense.

(2) TETLP is supported by long-term firm contracts, mostly with local distribution utilities, with an average remaining term of about four years, resulting in earnings stability. The average contract life continues to decline as several long-term shippers have converted to evergreen contracts that are renewed on an annual basis

(3) The Company has competitive tolls from the Gulf Coast to the key U.S. Northeast market. Demand is seasonal with throughput peaking in the winter months.

(4) TETLP has a strong balance sheet, interest coverage ratios and free cash flow generation. These measures are expected to remain favourable relative to its peers, although free cash flow could be reduced by higher capex related to potential medium-term expansions. The Company has proposed a number of projects to meet growing natural gas demand in the U.S. Northeast.

(a) The company has filed an application with the U.S. Federal Energy Regulatory Commission (FERC) for The Northern Bridge project, which would expand the existing pipeline system from Clarington, Ohio (also the endpoint of Kinder Morgan Energy Partners, L.P.’s (KMP) Rockies Express Pipeline), to its market area at Oakford/Delmont, Pennsylvania. Northern Bridge would cost approximately $45 million and transport up to 150 million cubic feet per day (mmcf/d). The company has already signed transportation agreements with shippers, and Northern Bridge is expected to begin operations in November 2009.

(b) TETLP recently concluded a non-binding open season for its Texas Eastern Appalachia to Market (TEAM) expansion project to transport Appalachian natural gas to the U.S. northeast. Targeted capacity of the project is 300 mmcf/d, and the first phase of the scaleable project could be in service as early as November 1, 2011.

(c) The proposed Time 3 Project would expand Texas Eastern’s capacity within Pennsylvania and transport approximately 120 mmcf/d of additional gas with an anticipated in-service date in late 2010. TETLP completed an open season May 2008 and continues to work with shippers to develop the project.

(d) The proposed TEMAX project would expand TETLP’s capacity and transport approximately 395 mmcf/d of Rockies gas for an estimated cost in excess of $500 million. ConocoPhillips has executed an agreement to deliver the gas from Clarington, Ohio to Station 195 on Transco with an anticipated in-service date in November 2010.

(5) TETLP faces significant competition for supply and end user markets.

(a) The Company competes for supply with a number of pipelines including Transcontinental Gas Pipeline Corporation (Transco), ANR Pipeline Company (ANR) and Natural Gas Pipeline Company of America (NGPL). In addition, KMP’s KM Louisiana Pipeline project, expected to be in service by April 2009, would compete with TETLP in the Gulf Coast.

(b) TETLP also competes for end user markets with several pipelines, including Transco, Consolidated Natural Gas Company (CNG), Iroquois Gas Transmission (Iroquois), and Maritimes & Northeast Pipeline LLC (M&NP). KMP’s Rockies Express Pipeline project, expected to be fully in service in 2009, will compete with TETLP into the U.S. Midwest.

(c) TETLP could face competition from the Algonquin Gas Transmission (Algonquin, a subsidiary of Spectra Capital) proposal to direct Liquefied Natural Gas (LNG) from the eastern end of the Algonquin system to the northeast U.S. The proposal would increase the Algonquin system’s capacity by more than 746 mmcf/d at a cost of $380 million.

(d) Growing pipeline industry competition could negatively affect earnings in some of the markets served by TETLP. Its tariffs will have to remain competitive in order to ensure that its volumes remain high and an adequate rate of return can be achieved as its long-term contracts approach maturity.

(6) TETLP, which sources much of its natural gas from the Gulf Coast region of Texas and Louisiana, has in place a number of expansion plans to tap additional resource areas (largely in the Rockies) and maintain throughput levels over the long term given high production decline rates and limited gas production growth in some mature basins that provide throughput for the network. The risk of declining production may be partially mitigated with the focus on LNG deliveries into the Gulf Coast and if deepwater Gulf of Mexico (GOM) gas production grows significantly.

TETLP was subject to income tax under a tax-sharing agreement with Duke Energy Corporation (Duke Energy) in 2006, prior to the spin-off of Spectra Energy from Duke Energy on January 2, 2007. Effective with the spin-off, TETLP is no longer subject to the tax-sharing agreement. Consequently, $830 million of deferred income tax liabilities and taxes accrued were eliminated and recorded as an increase to Partners’ Capital on the Consolidated Balance Sheet. In addition, TETLP’s reported net income, cash flow and equity base increased significantly beginning in 2007. However, pre-tax earnings remain in line with those of previous years. Consequently, DBRS does not view the accouting adjustment as a material event that would affect TETLP’s credit rating.

Note:
All figures are in U.S. dollars unless otherwise noted.